Finally, some good news for Abercrombie & Fitch Co. (NYSE:ANF). ANF stock hit a 52-week high on Monday, thanks to strong earnings and some newfound optimism toward the retail sector as a whole.
For its part, A&F posted a blowout Q3 on Friday. Adjusted EPS of $0.30 was a huge improvement from the $0.02 generated in the prior-year quarter.
Comparable-store sales growth of 4%, led by an 8% increase at Hollister, crushed consensus expectations for a 0.3% gain.
And Abercrombie & Fitch Co. wasn’t alone in surprising to the upside among mall retailers. Gap Inc (NYSE:GPS) similarly touched a 52-week high after a strong Q3 of its own. Foot Locker, Inc. (NYSE:FL) gained 28% after its Q3 report.
Suddenly, there’s some newfound optimism toward retail – in particular, mall-heavy offerings – after years of steadily declining stock prices. And ANF is benefiting. But there’s reason to be cautious as well.
ANF stock is trading on sentiment at the moment, and that sentiment has boosted the stock in the past. But the long-term trend here remains lower lows and lower highs: ANF still is off 75%+ from its 2011 peak.
In other words, we’ve been before, and for years now, the best bet has been to sell ANF stock into any strength.
A Volatile 2017 for ANF Stock
Back in June, I highlighted ANF stock as one of 10 ready for a big move in either direction. As it turns out, I was right, twice.
Takeover talks that had boosted the stock in May would fall through: ANF stock plunged as a result, and would fall below $10 for the first time since 2001. But a Q2 beat jumpstarted a rally.
Those gains came to a brief end with a downgrade from JPMorgan Chase & Co. (NYSE:JPM) in late October, only for ANF stock to once again rise coming out of 2017. The stock now has almost doubled from early July lows.
The point here is that ANF stock is not for the faint of heart. From a fundamental standpoint, earnings remain minimal on a full-year basis.
What value investors see in Abercrombie & Fitch Co. is based on modeled earnings that are still years out. They’re based, in short, on sentiment toward the industry and the turnaround case for A&F.
And I still think that’s a reasonably tough case to make, and it’s one that rests on factors beyond Abercrombie’s control.
As long as mall traffic is declining mid-single-digits, as appears to be the case, and as long as ‘omnichannel’ efforts hurt margins, which will always be the case, any substantial earnings growth is going to be difficult at best.
Bear in mind that A&F’s rival, American Eagle Outfitters (NYSE:AEO), has been one of the best performers in the mall space. It grew same-store sales 2% in the first half (AEO hasn’t reported Q3 yet), with its aerie brand posting a sizzling 26% comp.
And yet backing out its $1+ per share in net cash, AEO stock still trades at less than 13x this year’s EPS estimates. At the same multiple, ANF would have to generate over a dollar in EPS to support its current ~$17 per share price. It’s likely to make roughly a dime this year.
ANF Stock Has A Chance
That’s not to say that Abercrombie & Fitch Co. has no chance. The Hollister brand actually is the driver here, generating 57% of first-half revenue.
That banner has seen an incredible turnaround, with same-store sales reversing from -14% in FY13 and -10% in FY14 to flat the last two years and +6% so far in FY17. The namesake brand is improving as well.
Meanwhile, expenses have been slashed, and the company has room to either shrink its footprint going forward (like Gap and many others have) or negotiate rent reductions from mall owners.
Direct-to-consumer sales rose 11% in the third quarter, another potential driver for the top line going forward.
The narrative over the past few sessions has been that retail isn’t quite as dead as many assumed. Even mall retailers, it appears, may be able to survive the onslaught from Amazon.com, Inc. (NASDAQ:AMZN).
Abercrombie & Fitch Co. earnings for Q2 and Q3 seem to support that thesis ahead of the all-important holiday quarter.
Take the Money and Run
Still, I’m hardly ready to put any money behind ANF stock at these levels. Again, we’ve been here before: ANF touched $32 in March 2016 as investors saw ‘green shoots’ of a turnaround. Within a year, the stock had lost almost two-thirds of its value.
Retail still has issues beyond Amazon – pricing and traffic amongst them – and it is a cyclical space. One point I’ve made the last few years about brick-and-mortar sellers is that the recent disappointing performance is coming in a good economy. What happens when that changes?
And even for investors more bullish on the sector than I, ANF and its minimal earnings seem a poor choice. Certainly, I’d rather have AEO, given that aerie looks like one of the best concepts of any kind available at the moment.
Meanwhile, Gap’s execution has been outstanding, with its Old Navy-centered business still available for a reasonable multiple as well.
ANF stock certainly may have more room to run, particularly if sentiment toward retail strengthens through the holidays. But the past six years of trading in ANF, and the sector, show how fickle that sentiment is.
ANF stock has made a couple of big moves this year, in both directions. I wouldn’t be surprised to see the same in 2018.
As of this writing, Vince Martin has no positions in any securities mentioned.